Capital Gains Taxes

The taxation of capital gains is one of the most controversial issues in public finance in all developed countries and the United States is no exception. Relatively high effective tax rates on capital gains, especially in the corporate sector, can discourage investment and overall economic growth.

In the case of the U.S., capital gains are included in the taxable income of U.S. corporations. Only capitalization losses may be taken into account in determining such income.

For example, if a U.S. resident invested $5,000 in his business and later sold the company for $75,000, the difference of $70,000 will be considered capital gain and taxable. But if in the same period he sold another company for $50,000 in which he had previously invested $100,000, then such a transaction would be considered a capital loss. The difference between the capital gain of $70,000 and the capital losses of $50,000 would be taxable.

Capital assets generally include anything a person owns and uses for personal, pleasure, or investment purposes, including stocks, bonds, homes, cars, jewelry, and artwork.

It’s important to note another feature of this type of tax: If an asset was held for less than one year and then sold for a profit, it is classified as a short-term capital gain and taxed as ordinary income. If, however, the asset was held for more than one year before sale, the gain on that sale is classified as a long-term capital gain.

The rates on long-term capital gains are 0%, 15%, and 20%, but the limits on taxable income depend on who is filing: unmarried individuals, married couples (filing joint returns), heads of households or organizations, and trusts.

The corporate tax is the first modern tax in the United States and was introduced back in 1909